How To Save J.C. Penney: Shut Hundreds Of Stores, Say Business Professors

By: Forbes Email
By: Forbes Email

(Forbes)- Since J.C. Penney ousted CEO Ron Johnson on Monday, there’s been no shortage of commentary on ways the struggling retailer might save itself, from going private to revitalizing its merchandise.

There’s one possible solution, though, that’s been largely missing from these diagnoses: shutter some of the chain’s stores.

Despite a $5.5 billion decline in revenue since 2009 (not to mention their disastrous income statement), there’s been no net store closing in the intervening years.

“I’ve looked through J.C. Penney’s financials, and they’ve had the same number of stores – 1,100 – for the last five years,” said Bruce Clark, a professor of marketing at Northeastern University’s D’Amore-McKim School of Business.

“Some of them are really old and really sad. I’m having a hard time believing all these stores are valuable.”

A spokesperson for J.C. Penney disagreed, telling Forbes: “There are currently no plans to close stores due to total company performance.”

Even if shutting some of J.C. Penney’s under-performing outlets might seem like a no-brainer, the troubled company has an extra obstacle given most of its stores are within malls.

“Closing stores is probably necessary, but there’s a trap here,” said Mark Cohen, a professor at Columbia Business School and the former CEO of Sears Canada. “In malls, there are restrictive operating covenants. Retailers can’t just decide to close stores.”

These covenants can tie a store down for 2o to 25 years, particularly in regional malls where many J.C. Penney outlets operate. Breaking these agreements can result in multimillion-dollar penalties in some cases, with anchor stores like J.C. Penney (or Macy’s, or Bloomingdale’s) hit hardest if they try to renege.

“Mall covenants are the bane of a retailer’s existence,” said Robin Lewis, professor at the Graduate School of Professional Studies at the Fashion Institute of Technology (FIT) and author of retail strategy newsletter The Robin Report.

“The penalties are so large to get out of these malls – I’ve spoken to CEOs who shall remain nameless who’d rather stay and lose money,” said Lewis. “It’s the choice between that or saying, ‘Forget it, we’ll break the covenant and pay the penalty.’”

Former J.C. Penney CEO Myron “Mike” Ullman has been rehired to stem the bleeding that characterized the Ron Johnson era. It’s too early to know whether he’ll carry on the roll-out of Johnson’s controversial store upgrades and revamps.

Johnson had applied his experience as Apple’s retail guru, the man responsible for the gadget giant’s sleek, sexy interiors and much-lauded Genius Bar concept, to his role at the mid-market mall chain.

Instead of Apple’s Genius Bar tech support hub, J.C. Penney outlets were to be fitted with Denim Bars to help shoppers find the perfect jeans. Other Apple-inspired touches included roving J.C. Penney employees with iPod Touch devices, offering to ring up purchases and search for other sizes or styles on J.C. Penney’s site at a customer’s request.

If Ullman does decide to continue rolling out these upgrades, he’ll have to consider whether they’ll work in some of the chain’s rural stores in blue collar towns.

“If they stick with converting and repositioning, these conversions will not be doable or acceptable in some of their ‘B’ and ‘C’ areas,” said Robin Lewis.

Exactly how many stores have to go is open for debate, but with the massive loss in sales that plagued the Johnson regime, it’ll be more than a handful.

“We’re talking about 1,100 stores,” said Mark Cohen. “When you drop $4 billion, like Johnson did, suddenly you’ve got hundreds of problematic stores.”

Exiting under-performing stores will kill two birds with one stone, moving inventory to more successful J.C. Penney outlets and generating much-needed cash for the company as it undergoes recovery efforts.

For now, the focus should be on stores in higher end malls, where Johnson’s modernization efforts might reap some benefits. “There are 1,100 stores today,” said Lewis. “They may end up with 700.”

Bruce Clark believes Ullman could do worse than look to a competitor for guidance on scaling down its retail operation.

“Macy’s is doing a good job of consolidating and acquiring properties,” he said. “They’re much more effective in the mid-market range. Of course, Macy’s could just be the ship sinking the slowest.”


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